The International Corporate Governance Network (ICGN) is a significant influence on global corporate governance standards. It is a not for profit body founded in 1995 which has evolved into a global membership organisation of 450 leaders in corporate governance in 45 countries, with institutional investors representing assets under management of around US$9.5 trillion.
The ICGN’s mission is to raise standards of corporate governance worldwide.
ICGN is holding its annual conference in Australia this year. Attending will be a global who’s who on governance standards from around the world. It is being held in Sydney on 13 to 15 July (link HERE for ICGN generally, and HERE to review more details on the conference).
ICGN has a Remuneration Committee which is active in the development of ICGN guidelines on the subject (see link HERE)
The most recent piece they have produced relates to Non-Executive Director (NED) remuneration. To access this, go to the Remuneration Committee page using the link above, then you can click through a link to the draft guidelines.
Comments were invited (up to 1 July 2009) on these guidelines, and Guerdon Associates has provided comments, summarised below. We agree with much of the document, and have focussed our response on three areas within the draft, as well as a fourth which we felt should be covered. An extract of the relevant part of the ICGN document is inserted below, followed by our response.
3.1.2 Outside advice
The ICGN believes that committees should have the ability to utilize a compensation consultant for assistance on non-executive director remuneration plans. In cases where the committee does utilize a consultant, it should always retain an independent compensation consultant or any other advisors as deemed appropriate to assist with the evaluation of the structure and value of non-executive director remuneration. A clear summary of the pay consultant’s advice should be provided in the annual proxy statement. The remuneration committee should disclose all instances where the consultant is also retained by the committee to provide advice on executive remuneration. In no circumstances should the committee utilize a consultant for non executive director or executive remuneration who is also retained by management.
1. The guideline suggested has appeal, but may be difficult to put into practice. While there is a requirement to disclose a statement of qualifications in regard to the accounts authored by the company’s auditors, this guideline does not suggest a similar process for remuneration advisers. If it did, some disclosures would become unwieldy, given that a board may have employed several advisers. And if it does not, then the author of the summary of the advice is the company. Such a summary will require liaison and some authorisation from the consultant. Even so, it may not be as the adviser would have written it.
2. There is the question of what constitutes an adequate summary. Even on pay level recommendations, is the recommended pay level sufficient, and/or the percentile policy this accords with, and/or the peer group recommended that provides the basis for the pay level, etc?
3. The requirement to summarise the consultant’s advice needs to make allowances for commercial sensitivity. Disclosure of some advice, even in summary form, may require a summary of context that may cause material harm if disclosed.
The ICGN suggests share ownership guidelines of at least three to five times annual compensation.
1. This is a very high requirement that would be difficult for some professional NEDs to apply (i.e. Those on 3 or more boards).
2. Share ownership guidelines need to consider the nature of the company and shareholder expectations. Hence, growth companies may have high share price volatility. While investors typically diversify to minimise risk, this would be less open to a NED required to hold significant personal wealth in the stock. In this context there are two unintended consequences. A NED may not be attracted to a volatile stock company that requires top ups of shareholdings when there is a price drop as a result of general market sentiment (high beta stocks). In addition, NEDs may require risk minimisation strategies to reduce volatility given these problems, when the investor requires higher risk for higher returns.
3. Alternatives to this policy may include encouragement of NEDs to receive payment in equity (options or shares, depending on the nature of the company), with stock liquidation discouraged until retirement.
Aside from meeting-related expenses such as air-fare, hotel accommodation and modest insurance, the ICGN believes that directors should receive no other perquisites.
In most jurisdictions, it would be critical (and common) to have D&O Insurance funded by the company, otherwise most good candidates would not join a Board and put assets at significant risk.
The guidelines are silent on the use of options vs. full-value equity. There is a reasonable view that options are highly appropriate in developing early-stage companies which pay low cash retainers.
Some reference to this should be incorporated if the guidelines are intended to be considered by these small companies.
The ICGN carries a difficult “global” mandate, trying to contribute to the governance debate with principles which are relevant across many jurisdictions, cultures and business / industry scenarios.
They have done a good job in developing guidelines on NED remuneration which will tend to improve practices globally. Countries such as UK and Australia which have had active governance “movements” and have incorporated good governance principles into legislation and regulation may still find the guidelines useful as a checklist for comparison.
As the ICGN is the major force in global governance standards, readers may be interested to scan the work of ICGN, or to attend the conference.© Guerdon Associates 2022 Back to all articles